There Are Reasons To Feel Uneasy About Amita HoldingsLtd's (TSE:2195) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Amita HoldingsLtd (TSE:2195), it didn't seem to tick all of these boxes.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Amita HoldingsLtd is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.097 = JP¥474m ÷ (JP¥6.4b - JP¥1.6b) (Based on the trailing twelve months to March 2025).

Therefore, Amita HoldingsLtd has an ROCE of 9.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.8%.

View our latest analysis for Amita HoldingsLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Amita HoldingsLtd.

So How Is Amita HoldingsLtd's ROCE Trending?

In terms of Amita HoldingsLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.7% from 13% five years ago. However it looks like Amita HoldingsLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Amita HoldingsLtd has decreased its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Amita HoldingsLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Amita HoldingsLtd's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 113% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 2 warning signs we've spotted with Amita HoldingsLtd (including 1 which shouldn't be ignored) .

While Amita HoldingsLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.